ID-76-23 Coproduction Programs and Licensing Arrangements in Foreign

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L)epartments of Defense and State

Coproduction and licensing orrangaments cover a diversity of defense items msnufac- tured in other countries. Although the&? arran oments contain clauses which restrict trens Bers to a third country of U.S. defense items, no formal procedures or mechanisms exist to insure phat such transfers are not made vrithout prior approval of the President. There is a lack of statutory coverage on sales of defense servicxx, which include the sate of defense information. The United States has no statI-tory control over third-country transfers of defense articles produced by tha pur- &sing country using such defense infonna- tion. There is no restraint on granting U.S. azxxoval to third-country transfers under

ID-76-23 DEC. 2J.975 B-l 63582 a The Honorable Thomas E. Morgan, Chairman , I. C!3 , cc Committee on International Relations u-.‘ - House of Representatives T Dear Mr. Chairman : This report is in response to section VII of your latter of February 5, 1975, asking us to study military and mil itary-related assistance programs abroad. As you requested in subsequent discussions, we also reviewed the legality of certain transfers of F-104s aircraft from Italy to Turkey in view of the congressionally imposed cutoffs of military assistance to Turkey, This information is contained in appendix I. From the inception of the program in 1960, 33 coproduction agreements have been signed valued at $9.8 billion and agreements valued at $2.1 billion are under consideration. These agreements involve the production of such diversified defense items as armored personnel carriers, howitzers. tanks, rifles, machineguns, ammunition, he1 icoptt 1-s, anti-tank rockets, aircraft, and vessel 6. WC also identified 387 industry-to-industry 1 icensing arrangements, 71 percent of which cover the production of aircraft parts. other mi3 itary items being produced in foreign countries under 1 icensing arrangements with P.S. firms include aircraft, missiles, ammunition, armor, radar, fsonar, gyroscopes, and electr ical parts. 1 Formal procedures or mechanisms do not exist for detecting whether defense articles snJd tc foreign countries are transferred to third countries without the prior approval of the Prer,ident. Coproduction and 3 icensin7 arrangements contain clauses which restrict third-cruntry transfer of U.S. defense items. However, as in the case of defense

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articles which are sold, there are no formal procedures or mechanisms to insure that transfers to third countries are not made without the prior approval of the President. Controls over the disposition of military items produced under license in foreign countries is one of the concerns in this tyw of arrangement. In addition, changing political conc?itions sometimes makr! it necessary to amend license provisions. Our review of the legality of certain transfers of F-10& aircraft from Italy to Turkey revealed that . neither of the two salp,: of 18 F-104s aircraft was illegal despite the cL..gressiona13y imposed cutoff of arms to Turkey. The first cutoff prohibited the use of appropriated funds by the U.S. Government for military assistance cr for sales of defense articles and services to Turkey. The second cutoff prohibited all military assistance, sales of defense articles and services, and licenses for transportation of arms, ammunition, and implements of war to the Government of Turkey, as we11 as the use of appropriated funds therefor. S into none of the parts of the Memorandum of Undersranding reflect any United States-Turkey transaction, none of its provisions are directly affected by either cutcff.

Restriction on third-country transfers in subsection 3(a) of the Foreign Military Sales Act are not applicable to sales of defense services, which includes the sale of defense information. Consequent1 y, the United States has no statutory cw?roP over tprrd- country transfers of defense artlc..es produced by the purchasing country using such defense inf 3rmat ion. i There ia a significant difference between the ! restrictions on third-country transfers contained in subsection 3(a) of the Foreign Military Sales Act and those included in the International Traffic in Arms Regulations (22 CFR 124.10(m)). Under the provisions of the Foreign Nilitary Sales Act, the L’rssident cannot give his consent tc the transfer unle:ls the United 1 . States itself would transfer the defense article to the country. No such restraint exists on the granting of 9 U.S. approval to a ,ransfer under the Arms Regulation.

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Several studies have been made which address the impact of arms sales on U.S. employment. Howe*Jer , these studies focus on reduced defense expenditures, not specifically on the employment impact of coproduction and licensing arrangements. ‘If the assumption were made that foreign countries would buy directly from the Unikd States were no co2roduction alternative available, coproduction and licensing arrangements could result in ~7 loss to U,S. 1 abor . Conversely if nti sales of an item would be made were it not to be coproduced, coproduction would have a positive effect because part of the item would be produced in the United States.

If 1 iceneing agreements are considered a8 an extension of U.S. production capabilities, they could also be considered to 5ave a beneficial effect on the U.S. economy since the L’.S. firm would be realizing . license and royalty fees which contribute to the profit margin of the firm and the U.S. tax b?se, as well as to the balance of payments. As requested by your office, we have not obtained ~. I written comments from the Departments of defense and L-- State on matters included in this report. ,r “.i

Comptroller General of the United States

3 --w--s--Contents

Introduction Legislation Background Advantages and disadvantages of coproduction and licensing program 7 Control over third-country transfers El Impact on U.S. employment 12 Future coproduction effort--the F-16 aircraft program 13 Schedule of coproduction and licensing 19 agreements 8. Examples of licensing and coproduction 24 projects Legal review of F-104s aircraft transfer from Italy to Turkey 27 Bibliography 42 \

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, COPRGDUCTIGN-_. ..--.__ PROGRAMS AND LTCENS-. i6G -. ARRANGEME~u'T~-~'E'o~~~~~~~~~~~~~----_..--mP-.m.--- . - -.-_-

SNTRODUCTIONv- The term “coproduction“ refers to the program by . which the UnIted States and an eligib!e country join together in producing a U.S. mil itaty system or item in the foreign country. The combined effort may be government-to-government, industry-to-industry, or a . mix of government and private resources. Coproduction projects may be implemented either directly through the Foreign Military Sales prcgram or indirectly by designated commerciai firms through specific licensing arrangements. The arrangements enable an eligible foreign government, international organization, or designated commercial producer to acquire substantial know-how to manufacture or assemble, repair, maintain, and operate in whole OL in part a specific weapon, communication, or support system for an individual mil itary item. The know-how furnished by the United States may include research, develcpment production data and/or manufacturing machinery or tools, raw or finished mater ial, components or major subassembl ies, manager ial skille, procurement assistance, or quality control proceiiur es. Coproduction may be limited to the assembly of a few end items with a small input of parts produced incountry or it may extend to a major manufacturing , effort requiring the buildup of capital industries. pajor objectives of coproduction projects, as defined by Department of Defense directive:, are to (1) enable eligible countries to improve mrl itary readiness through expansion of their technical and . military support capability and (2) promote U.S. allies’ standardization of military mater ial and equipRent, which in turn would generate the establish- \ ment or’ uniform procedures and logistics support and I would expand mu1 t:national operational capabil it ies.

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Scope of coproduction agreements

Coproduction i;rOgiCiZlS currently involve the production of such diverse defense items as armored personnel carriers, howitzers, tanks, rifles;machineguns, a,nmunition, he1 icopters, anti-tank rockets, ‘aircraft, and vessels. (See app. III for examples of projects.) From the inception of the program in 1960, 33 coproduction agreements have been signed valued at $9.8 bill ion. (See app. II.) . Five coproduction agreements valued at $2.1 billion are under consideration for projects in Iran and Korea. The matter of coprocluction in Iran has been the subject of an interagency study and we were informed that a classified report has been prepared, with an executive summary for the President’s consideration.

* Scope of licensing arransments-- -- Presently there are 387 industry-to.-industry licensing arrangements bith 15 countries and NATO. More than 90 percent oC all these arrangements are with 6 countries, an<; ;1 percent of the arrangements cover the producti-,‘I of aircraft parts. Other mil i- tary items include aircraft, missiles, ammunition, armor, radar , sonar, gyroscopes, and electr ical pClr ts. (See app. II.)

LEGISLATION -_----_ \k U.S. coproduction and licensing arrangements in foreign countries are currently atithorized by the Foreign Military Sales Act of 1368, as amended, and the International Traffic in Arms Regulations :?2 CFR 121-128) which were issued under the Mutual Security Act of 1954. In addition, the Foreign Assistance Act of 1961 authorizes grant assistance for use in coproduction projects.

Foreign Military Sales Act

Public Law 90-629, the Foreign Mil itary Sales Act of 1968, as amended, states that the United States will enter into agreements to facilitate the common defense of friendly foreign countries. It provides

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that special emphasis be placed on procurement of milf- tary articles in the United States but that consideration of defense articles of U.S. origin be given to coproduction or licensed production outside the United States when such production best serves U.S. foreign pol icy, national security, and economy. To this end, the Departments of State and Defense and the military services have issued directives and regulations implementing the coproduction and licensing program.

Mutual Security Act of 1954

The lYutua1 Security Act of 1954 requires the President to control the export and import of arms, ammunition, and implements of war, including technical data, by other than a U.S. Government agency. These articles, as designated by the President are included in Title 22, subchapter M of the Code of Federal .Regu- lations. The regulations also include registration provisions; information on licenses for unclassified arms, ammunition, and implements of war; manufacturing 1 icenses and technica assistance agreements; unclassified technical data and classified information; and prohibit shipments to or from certain countries.

The act also currently provides the statutory basis for U.S. support of NATO. In accordance with this act, the United States has furthered the development of coordinated production and procurement programs within the NATO Alliance. BACKGROUND

Program funding I Funds needed to coproduce’ an item may take the form of Foreign *Military Sales credits, grant aid, cash reserves of a foreign country, or any combination of each. Each year Congress has authorized limits on the extension of Foreign Military Sales credit. This credit may, upon approval of the Eresident, be used ftir financing coproduction projects within foreign countries. The funds are repayable with intertzst within 10 years after delivery of the defense articles or the rendering of the defense services.

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For example, in May 1974 the Unit ?d States signed a Memorandum of Understanding with the Republ ic of the Philippines to establish an M-16 rifle assembly and manufacturing capability there. tinder this agreement, the United States would provide a maximum of $15.6 mfl- lion in Foreign Military Sales credits or in loan guar- antees from private lending institutions at interest rates equal to the cost of money to the U.S. Government during the month in which the credit agreement was signed . Grant aid fur:ds may be used alone or in conjunction with Foreign Milit ;y Sales funds to finance a coproduction project. This method of funding was used for the I(#3rean ammunition coproduction program. In other cases, coproJuction programs may be funded without any form of U.S. assistance. Approval responsibil it& Before a potential coproduction agreement can be consummated it must be sanctioned by a number of organizations. i’he Office of the Assistant Secretary of Defense (Installation and Logistics), the Defense Security Assistance Agency, the military services, the White House and the State Department must all concur in government-to-government agreements. --The Defense Security Assistance Agency acts as the negotiator with the foreign country and arranges for the contract terms, i.e. amount to be produced, payment, delivery dates, etc.

--The miliLary services assist the Agency du::ing contract negotiations and may supply technical assistance once an agreement has been reached. During the negot;ations, a feasibility study may be conducted incountry to determine whether the country has the capability required to carry out a coproduction agreement. After production has commenced, the Army will send a

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t project official to monitor m37or coproduction projects. The Navy and Air Force do not foliow this procedure. The services also evaluate the impact of procurement and delivery of the necessary i terns under the proposed coproduction agreement. ’ --The White House approves or disapproves the agreement after considering its poli- c tical implications.

. --The State Department’s Office of Munitions Control exercises its influence by approv- ing coproduction licenses and issuing export 1 icenses. Before U.S. firms can ship articles agreed to under the terms of a Memorandum, of Understanding, they must obtain export licenses. The State Depart- ment thus gives its approval by issuing tne 1 icenses . -The Office of the Assistant Secretary of Defense (Installations and Logistics) eval- uates the logistical ?spet’ts of the proposed agreement and the affects the project will have on the U.S. military system and induc- try. The Office also considers the affect;s of potential future comp=fition from the foreign country due to the technology gained. The Arms Control and Disarmament Agency also acts in an advisory role in coproduction and licensing arrangements. Its main areas 0: interest are to determine whether decisions to furnish military assistance contribute to an arms race, increase the possibil ity of outbreak or escalation 12f conflict, or prejudice the development of bilateral or multilateral arms control arrangements. The! Agency also has an interest in preventing third-world countries from diverting funds needed for humanitarian and economic uses to military uses o

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Project initiaticn

A coproduction project may be l.litiated by the (1) Assistant Secretary of Defense (International Security Affairs) ,. (2) the Defense Security Assis- tance Agency with Prior Assistant Secretary of Defense (Installations and Logistics) coordina+ion, (3) the military departments subject to prior Assistant Secre-a tary of Defense (International Security Affairs), Defense Security Assistance Agency, and Assistant Secretary of Defense (Installations and Logibciz;; approval, (4) Military Assistance Advisorv Groups, and (5) authorized representatives of foreign governments and/or international organizations. The agreements may be on a government-to-government, industry- to-industry, and/or government-industry basis. If the agreement is government-to-government, a Memorandum of Understanding or “umbrella” agreement, is signed by the participating governments. Elements covered in such agreements include security, documentation, standardization, identffication, information flow back, reporting, source inspection, propr ieLary rights, qualified products, use of government equipment, sharing of research and development costs, expenditures in the United States, technical assistance, supply components, and resale or transfer to third countries.

Coproduction programs may alsc; he carried out on an industry-to-industry or industry-to-government basis 2nd are performed under licer1siug arrangements entered into by U.S. ccmpanies and foreign companies and/or governments . :he license arrangements must be approved by the Office of Munit’ions Control, and, before any military item can be exported, an export license must be o&tajned from that Office. In granting these 1 tenses that Off ice may solicit C&~C concurrence of respo. sible Departments of Defe,\se and State components or other interested agencies, such as the Nuclear Regulatory Commission, Nat ional Aerrtnaut ical and Space Administration, and Arms Control ano Disarmament Agency. , .

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ADVANTAGES AND D.ISADVANTAGES OF COPRODUCTIOflGD LICENSING PROGRAJ Whether coprodoction and licensing arrangements are ‘the most desirable means of achieving stated program objectives is largely a matter of value judgement. Because of the lack of uniformity in coproductfon c agreements, it is almost necessary to evaluate each agreement individually. Licensing arrangements better . lend themselves to evaluation since they hav? more uniformity --U.S. manufacturers grant foreign govern- ,Tents or industries the authority to produce U.S. items. Below are the pr inc ipal advantages and disadvantages of coproduction and licensing arrangements. No 0 attempt has been made to rank them in order of priority or importance.

--Advantges --Create incountry compatibility with U.S. standardized equipment, thereby creating all ied ccr?patibil i’;y for supgor t ing de- ployed U.S. Forces.

--Promote standardization of materiel or equipment to integrate and strengthen international mil itary operations. I,. --Encourage multinational acceptance of strategic and tactical concepts through use of common mater iel equipment. --Establish or broaden base for common :nd interchangeable logistics. --Improve procurement, production, contract administration, and mutual support cep- abilit:r of friendly nations.

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--Permit entry into foreign markets at minimum investment cost and into markets that, due to import restrictions, might otherwise be closed to direct salts. --Avoid erpense of having to adjust home- based production and personnel to sometimes unstable demands. --Obtain additional revenue from ccmpany- owned patents, trademarks, and accumu- lated know-how.

--Gain some tactical or strategic advantage in marketing U.S. manufacturerll’ products overseas. ,. --Develop market outlets for raw materiaJs or components made by the domes t ic com- paw. L Disadvantages --Create the potential for foreign competition.

--Unit cost. may be higher to foreign country. I --Loss of technology by the United States. --U.S. labor employment loss if straight salts of U.S. manufacture would have been an alternative. \ CONTROL OVER THIRD-COUNTRY TRANSFERS I . The government-to-government agreements as well as the industry-to-industry and industr y-to-government licensing arrangements contain claus?s which restrict third-country transfer of U.S. defenl%e items, but there are no iormal procedures or mechanisns to insure that U.S.-furnished defense articles are n>t transferred to third countries without prior approva.! of the President.

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There is a significant difference between the restrictions on third-country transfers contained in subsection 3(m) of the Foreign Military Sales Act and those included in the International Traffic in Arms Regulations (22 CFR 124.10(m)). Under the provisions of the Foreign Military Sales Act, the President cannot give his consent to the transfer unless the United States itself would transfer the defense article to the country. No such restraint exists on the granting of U.S. approval to a transfer under the Arms Regulation. No substantial transfers to third countries have been reported by Departments of State and Defense personnel . The consensus is that, although there are no formal procedures or mechanisms to insure that U.S. defense items furnished, coproduced, or manufactured under license agreements have been transferred to third countries without the prior approval of the President, no transfers of consequence have occurred or could occur without coming to the attention of U.S. officials. U.S. Defense Attaches in countries around the world are always alert to this type of situation. Military Assistance Advisory Group personnel also report third-country transfers through the Departments of Defense and State if and when they become aware that such transfers are being made. The following cases Illustrate problem areas in 1 icensing arrangements. Anti-submarine/assault-type he1 icopter s Iri July 1959, the Office of Munitions Control approved a 5-year 1 icensing arrangement for the manufacture of an anti-submar ine/asaaul t-type he1 icopter. On March 4, 1964, the licensee exercised its option to extend the terms of the agreement for 5 additional years. The agreement was again amended on November 15, i 1967, to extend the terms for a further period of 10 i years ending Julv 27, 1979. This agreement contained a worldwide sales territory provision which excluded United States, Canada, and Sino-Soviet bloc destina- tions. However I during 1966-69 the U.S. Government found it necessary--in response to changing pol it ical conditions, particularly in the Middle East, and to

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related congressional pressures--to revise and update third-country controls,. particularly as they applied to foreign licensing of LJ.S .-orig in hardware,

For 3 years the licensee refused to change the worldwide sales territory. In 1966, the Office of Munitions Control requested the U.S. licenser to revise the sales territory to specific countries. The licen- sor , after 3 years of trying to accompl ish this, not i- fied the Department of State in 1969 that the licensee remained adamant and that the matter should be handled goverrrrnent to government. As reports of pending sales of this he1 icopter to India and Egypt were received during 1971 through 1973, the situation evolved into a drawn out awkward affair for the companies and the governments concerned. In November 1973 representatives of both governments met . to attempt to resolve the problem. The 1 icensee was not in legal violation of terms rk U.S. Government approval of the original agreement but was acti.ng con- trary :o the intent and spirit of U.S. export policies and requlations. Modifying tne sales territory provisions would prevent U.S .-identified equipment from going to prohibited or restricted areas and wou1.d avoid direct conflict with U.S. export control policies. In June 1974, the U.S. Government received assurance from the foreign government that helicopters ma-rufactured under the licensing agreement would not be transferred except to NATO countries, Sweden, Switzerland, Spain, Japan, Australia, and New Zealand without prior con- sultations with the U.S. Government. After such con- sultations the final decision in each case will rest with the foreign government.

-F-104s Aircraft The F-104s aircraft is coproduced in Italy under a license from the Lockheed Aircraft Corporation and pursuant to a Memorandum of Understanding between the ministry of defense of Italy ard the U.S. Department of Defense.

At the time cutoff of military assistance to Turkey was being considered, enacted, and reconsidered --October 1974 to February 5, 1975--permission was obtained by Italy from the United States to transfer

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P-104s aircraft to Turkey. In view of the congressionally imposed cutoff of military assistance to Turkey, we were requested to review the legality of certain of these transfers.

The embargo on transfer of military arms to Turkey began on October 17, 1974, and has been in effect con- tinuously thereafter except from October 29 to December 10, 1974 and December 31, 1974, to February 5, 1975. T!re issue presented is whether either or both cutoffs affected the legality of two sales of F-104s aircraft, each consisting of .‘8 planes. The most important considerations in such a determination are the form of the transact ion fi the fact that the contemplated sales were from Italy to Turkey rather than from the United States, and the dates on which the events occurred. A detailed description of these considerations is included. in append ix IV. The first cutoff prohiblted the use of appropriated funds by the U.S. Government for military assistance or for sales of defense articles and services to Turkey. T?c second cutoff prohibited all military assistance, ail sales of defense articles and services, and all licenses for the transportation of arms, ammunition, and implements of war (including technical data related thereto) to the Government of Turkey as well as the use of appropriated funds therefor. The United States- Italian Hemorandum of Understanding contained no refer- ence to United States-Turkey izansactions. Therefore, none of its provisions are directly affected by either cutoff. In addition, rostr ictions on third-country transfers in subsection 3(a) of the Fore’ign Military Sales Act are not applicable tp sales of defense services, which includes the sale of defense information. Consequent1 y, the United States hal, no statutbry control over third- country transfers of defense articlles produced by the purchasing country using such defe,lse information. For example, had the U.S. Government sc Id defense information --any document, sketch, photograph, plan, model, specif i- cation, design, prototype or other ,-ecorded or oral information relating to any defense artic,le 0’ defense service --covering the F-l 04s to Italy, it kculd have no statutory control of tranofcra by Italy of the F-104s produced in

- , . . -, -. . . :- _. . ‘* APPENDIX I APPENDIX I s Italy to any recfpient third country, including Turkey. Equally important are the facts that we know of no U.S. Government-furnished defense articles in the transferred aircraft and the arms regulations (22 CFP 124.10(m)) does not prohibit granting third-country transfer approval where the United States could not make a direct defense article transfer, .I‘husf neither of the two sales were illegal despite the congressionally imposed cutoff of arms to Turkey. IMPACT ON U.S. EMPLOYMENT . Studies have been made which address the impact of -- arms sal e8 on fJ.§, employment. However ; thescl studies focus on the impact of reduced defense expenditures and not specifically on the employment impact of coproduction and 1 icensing arrangements. Some of the studies we identi..+.ed are: --Survxof Economic Models for Anal sis of Disarmament Impact.s, University. +gan,0 July 1965 --The Tfmin of the Impact of Government z~;$u:;;~ University of Pittsburgh,

Colorado, December 1970

-. --Post-Vietnam Economy. U.S. Department of Labor, November i971 One available study of the economic effects of a coproduction project is a recent section of a classified GAO staff study of the Multinational F-16 Agreement, dated September 2, 1975, made at the request of the Chairmanp Senate Committee on Appropriations. Included in this study a5 attachment C is an economic analysis of th: F-l 6 agreemen 1:. The study analyzes the agreement’s primary effects on U.S. production and estimates the economic impact on the overall economy, balance-of - payments, and regional economics. Jf the assumption were made that foreign countries would buy directly from the United States if no coproduction alternative was available, then ,,coproduction and licensing arrangements would res:llt in a loss to U.S. Q c\ ---

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labor. On one coproduction project for the assembly of 10,000 radios, it was estimated that GO man-years of U.S. employment wouid be lost because of the assembly of these radio8 abroad. However, coproduction agreements are general1.y only considered as the 1~;: :!ter- nati.ve in providing military assistance. If the assumption were made that no sales of the c item would be made were it not to be coproduced, it -an be said that coproduction has a positive effect on ihe U.S. employment situation. Since, in most cases, . approximately 50 percent of the value of the coproduction agreement is provided from U.S. sources, some employment opportunities would be created in the United States. One U.S. firm estimated that, as a result of an estimated $29.4 million coproduction project, it would be able to retain approximately 450 employees for a period of 6 months to 1 year longer than they would have been retained without the coproduction contract. Licensing agreements, if considered as an exten- sien of U.S. production capabilities, could also be considered to have a beneficial effect on the U.S. economy since the U.S. firm would be rea; izing license and royalty fees which contribute to the profit margin of the corporation and the U.S. tax base as well as to the balance of payments.

FUTURE COPRODUCTIONEFFORT: .- THE F-16 AIRCRAFT PROGRAM When Secretary of Defense James R. Schlesinger signed a five-nation Memorandum of Understanding on June 10, 1975, the United States and a European Con- sortium (Belgium, Denmark, Norway, and the Netherlands) entered into what was described as “the arms deal of the century.” The program is a cooperative effort to design, develop, produce, and deploy F-16 air combat f ightcrs in the United States and Europe. As planned, the initial Consortium purchase of 348 F-16 aircraft will amount to more than $2 bill ion, and purchases by third countries ;/ill add to the program as subsequent F-16 sales are made, Planned purchases of the F-16 by the United States and th2 European Consortium are as follows.

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Number of Country aircraft United States 650 Belgium 116 Denmar k 58 The Netherlands 102 Nor way 72

Total --998

Initial U.S. proposal

The Consortium’s ministers of defense met in the fall of 1974 with Secretary of Defense Schlesinger to discuss U.S. proposals for coproducinq an advanced lightweight fighter aircraft. The proposals were intended to help European NATO members to modernize their air forces and reduce dependency on the United States. Secretary Schlesinger offered the Consortium the oppor- tunity to coproduce the winner of the U.S. air combat fighter competition, to participate in the development program, and to offset a large share of balance-Lf- payment costs through production within their own countc fes. On January 13, 1975, the U.t. Air Force selected the General Dynamics F-16 as the winner in the U.S. air combat fighter competition. Howf rler , before deciding to participate in the F-16 progran, the Consortium had considered various foreign aircraft. A Consortium steering committee conducted various technical and cost evaluations of the F-16, the French Dassaul t Mirage Fl/M53, and the Swedish SAAB-Scania Viqgen 37. The agreeients ’ I

The Memorandum of Understand.ng and the four Preliminary Contracts delineate th>? agreement by the five count& ies to enter into a cooperative program for procuring and producing F-16 aircraft. The Memorandum is a multilateral doc;rmal:t and contains production, assembly, and offset conmitments which can be classified under the term coproduc,tion. The four Preliminary Contracts are bflat?ral documents signed by the U.S. Secretary of Dcfelse and the min- ister of defense for each Consortium country.

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How agreements will work

General Dynamics, as prime contractor, has management respcnsibiJitirs for the design, development, and production of all F-16 aircraft. It will deliver the completed aircraft to the U.S. Government which, in turn, will deliver them to the Consortium. This dual delivery might occur simultaneously as a result of the I procedural arrangements; however, the Consortium governments wfll be customers of the U,S. Government, not of General Dynamics.

The relationship between General Dyllamics and its Consortium cocontractors and suppliers will be a direct relationship, based on contracts between the three parties.

U.S. avionics and subsystem suppliers will establish coproduction participation relationships with avionics and subsystem equipment industries in the Consortium countries. General Dynamics will select and contract with U.S. suppliers who will, in turn, establish coproduction programs with Consortium suppliers for parts and components to be supplied for U.S. Air Force, Consortium, and third-country F-16 aircraft. U.S. suppliers will be respr.lsible for supplier copro- duct ion, but General Dynamics will monitor this activ- ity with and through them. This monitoring will be necessary to establish confidence that the Consortium industry will support program requirements.

Coproduction offsets

The Memorandum’ of Understanding stipulates that, in U.S. Air Force contracts for production of F-16s, the prime cbntractor will place \:: th Consortium industries --10 percent of the procurement value of U.S. Air Force purchases,

--40 percent of the procurement value of all Consortium purchases, 2nd

1 --15 percent of the procurement value of all third-country purchases. 9 ,.

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The remaining procurement value of ali F-16s will be produced in the United States. Although Iertain components will be produced within the ConsorLium, the United States will maintain an autonomous capab"lity in this regard. Components produced within the 2?n- sortium will also be produced in the United States, eliminating U.S. dependence on Consortium contractors. European production and assembly Under the program, F-16s for Belgium and Denmark . will be assembled in Belgium by a joint Fairey,'SABCA effort and for the Netherlands and Norway by Fokker in the Netherlands. General Dynamics officials stated that these European assembly plants are necessary so that Consortium production offsets can be achieved by each country. Engine' modules for the Consortium aircraft will be assembled in Belgium by Fabrique . Nationale. Denmark and Norway will have primary respon- sibility for producing electronics systems and other highly technical systems and subsystems. All four Consortium nations will produce some parts for the U.S. Air Force F-16s --which will be assembled at the General Dynamics plants in Fort Worth, Texas--as well as for Consorti2m aircraft. Financial commitments The United States quoted the Consortium a unit cost of between $5.64 million (the most probable price) and $6.09 i1illion (the not-to-exceed price), computed in January 1975 dollars. Because of higher European production costs, the Consortium will end up paying more per aircraft trlan will the U.S. Air Force. The United States has estimated that the Cons.ortiun: will incur a "most probable" flyaway unit cost for its 348 aircraft of $5.69 million. On the other hand, as a result of agreements with the Consortium, the Air Force expects to achieve an estimated flyaway unit cost of $4.6 million for ic,s initial buy of 650 aircraft. These "most probable" cost estimates are broken down as follows,

16 APPENDIX I APPENDIX I

U.S. Consortium Air Force (mill ions) Basic unit flyaway $5.02 $4.6 Research and devel- opmen t recoupment .47 N/A Industrial management fee (estimated) .005 WA Cost of duplicate tuol ing .196 WA Host. probable f 1 yaway $5.69 $4.6 cost -- The contract is a fixed-price, incentive-fee contract, insuring the manufacturer ‘s interest in the lowest possible cost.

Not-.*+- -to-exceed r-ice--This price resulted from the Consortllm’s esire to know the outer limits of its liability, Defense officials have informed us that the not-to-exceed price is an estimate and is not contractually binding on the United States. The United States was able to provide the Consortium with a not-to-exceed price ‘secause approximately 90 percent of the price is coverr-d contractually by airframe and propulsion commit- merits, The cost for radar and U.S. Government-furnished equipment are unknoifn factors: therefore, Defense informed the Consortium that the remainipg 10 percent coula not be guaranteed. General Dynamics be1 ieves the not-to-exceed price provides 51 sufficient. I cushion against loss because: --The YP-16 prototype gave !.t a firm fix on production, labor, and resource requirements. The F-111 program, which was subject to numerous cost overruns, had no working prototype at incept ion. --The target price of the U.S. Air Force and Consortium aircraft includes an inflation index which can be increased over time. If extraordinary inflation

17 APPENDIX I APPENDIX I

is exper ienced, the contract between the A c Force and General Dynamics will be adjusted.

--A cost contingency factor was added to the target price to arrive at the General Dynamic? not-to-exceed pr ice for the Consortium.

--Any change in orders or requirements to stretch production will require a new contract.

-- The United States will share all costs exceeding the stated target price on a predetermined basis with the pr ime contractor 5, up to the no t-to-exceed pr ice. The agreement contemplates that any costs in excess of the not-to-exceed price will be borne by the contractors.

18 .

APPENDIX II APPENDIX II'

SCHEDULEOF COPRODUCTIONAGREEMENTS #arch 1460 through July 1975

Service administering agreements' Total Expected and countries agreement U.S. Date of involved Item value value agreement - (millio;.s) ARMY: Germany UH-ID helicopters $ 228.4 $ 96.6 May 30, 1965 Italy Ml13APC family * 157.0 48.5 Feb. 12, 1963 M6Op.l Tanks 67.0 42.0 Oct. 3, 1964 . Ml09 SP howitzer 30.2 23.2 Feb. 1, 1468 At?GUS10 radar oystem 23.0 6.0 May 13, 1974

Japan HANK missile system 230.1 96.8 Oct. 13, 1967 NIKE HERCULES missile system 189.4 74.7 Oct. 13, 1967 ADCCS 33.1 12.7 Oct. 13, 1967

The Netherlands Ml09 SP howitzer 18.1 A.7 May 3, 1966 Norway Ml09 SP howitzer 16.3 12.2 Dec. 30, 1966 ;

19 APPENDIX II APPENDIX 11

Service administering agreements Total Expected and countries agreement U.S. Date of involved Item value value agreement (millions)

Korea #16 Rifle $ 72.6 $ 42.0 Apr. 22, 1971 Ammunition 80.4 43.9 Jan. 6c 1972 w;;,77 21.2 16.0 Aug. 14, 1973

NA’ID HiGiK missile system 658.0 140.8 Mar. 1960 HELIP 1,049.o 734.0 July 11, 1968 M-72-LAW 31.4 10.9 Jan. 20, 1964 The Philippines M-16 Rifle 29.4 21.8 Hay 17, 1974 Turkey 2.75 Rocktet 1.5 1.5 May 29, 1972 Iran M-47 Retro 53.0 -- 48.0 June 16. 1970 3r167.4 11616.2 AIR .'ORCEr Italy F-l 04s aircraft 641.0 115.0 Dec. 10, 1965 \ Japan F-4 aircraft 700.0 345.0 Apr. 4, 1969 Republic of China F-5E air- \ craft. 229.6 219.6 Feb. 9, 1973 NATO F-104G aircraft --1,;oo.o -..145.0 Dec. 17, 1960 3:070.5 824.6 APPENDIX II APPENDIX II

service administering agreemente lbta1 Expected ard.ccountrios asreement U.S> Date of involvecl Item -ValUe value agreement (mfll ioirn) . NAVY:

. Germany C&t-j3G he1 i- copter E $ 312.3 $ 176.6 June 27, 1968 England F-4 aircraft 700.0 610.0 Feb. 9, 1965 Italy SIDEWINDER missile erystem 20.0 10.0 Apr. 1, 1974

NATO SEhS PARROW missile eystem 39.7 34.0 June 1968 SIDEWINDER missile system 36.0 10.0

Spain BEG Ships 300.0 125.0 Nov. 1964 1,408*0 965.6 , F-16 Program (note a) 2,116.O Total $9,762.0 $3,406.4

/ The F-16 coproduction program had not, a8 of August 15, 1975, been assignti to a specific service. APPENDIX PP APPENDIX II

I “II

w I * -1 “II

“I *II’ ACTIVE LfCZNSt AGREENEN~ As OP MRCB 1975

stJxapxt eqolpennt AirSraft Nisslles SbiPS mtct- rd -- ArCil- end Radar/ ron1c Gyro- country PiSItS pLct Parts product lcry Armor partm Product * parts *copes --Tots3 Percent

Japan 79 3 4 1 1 3 3 4 3 101 26.1

Italy 58 4 3 2 2 2 1 1 2 75 19.4 N England 55 3 1 1 1 3 3 68 17.6 W terl&Wly 26 5 2 2 2 5 45 11.6

Pt ance 23 3 1 6 3 1 2 II 10.6 8.5 Israel - 22 - r 2 I - - 2 - 2 2 )3 265 10 15 4 2 2 10 6 1 4 14 6 11 11 363 93.8

Nations and NATO - 10 r 2 - 2 _?. - r - r r - 1 - 24 6.2 Total 215 11 18 4 a IO 2 1 5 I4 11 387 xz= a d g 2 = = s

PercenL 71.1 2.0 4.7 1.0 1.0 1.0 2.6 2.3 0.3 1.3 3.9 1 .b 3.6 2.1 100.0 APPENDIX II I APPENDIX 11 I

EXAHPL% 2,” ‘ICENSING AND COPRODUCTIONPROJECTS

M-113 VEHICLE PROJECT In December ,1962, the U.S. Army Materiel ‘Command began negotiating a Memorandum of Understanding with the Italian Government for 4,000 armored personnel carriers. The Memorandum was signed on February 12, 1963, and served as an umbrella agreement for the follow-on industry-to-industry agreements between the . U .S . company --Food Machinery Corporation--and the Italian coproducers--OTO-Melara, Fiat, and Lancia. The Italian Government was interasted in copro- duct ion to improve i te economy and technology, reduce unemplo ymen t , and gain a’competitive advantage in the manufacturing of tracked vehicles. The U.S. tepart- . ment ot Defense was interested in promoting foreign military salesp achieving maximum standardization of NATO equipment , and reducing the U.S. balance-of- payment deficit. Implementation of the terms of the Memorandum of Understanding and the supporting technical agreements consisted of a two-part, three-phase program. It al y purchased the first 1,000 vehicles through the Foreign Military Sales program and the remaining 3,000 vehicles were to. be coproduced in Italy. The first phase of :he coproduction endeavor provided that, beginning in December 1963, 200 vehicles were to be assembled in Italy, with the United States furnishing all the components. Under phase two, which was to begin in July 1964,. 300 vehicles we.re to be assembled using Italian-produced hulls and some parts, with the balance being furnished by the United States. Phase three, which was to begin in February 1965, provided that the remaining L ,500 vehicles would be produced in Itaiy by the most economical ccmbination of ltal ian and American manufactured components, This phase involved the production in Italy of the maximum number of components of the M-113, although certain components were uneconomical to produce in Italy because of the limited quantity required compared to the high cost of manufacture.

24 APPENDIX Ii I APPENDIX II I

/’ F-l 04G AIRCRAFT PRrJJEC”

In 3956 the German ministry of defense began look- ing for a new fighter aircraft to fulfill Germany’s role in the defense efforts of Western nations. In December 1958, after tent&Live selection was made of the F-104, Lockheed and Germany began discussinq configurations and contracts for follo+on prc?uction arrangements, which resulted in a two-part agreement. In February 1959 the German Goternment and the Lockheed Corporation signed a contract for the initial de1 ivet-y src’ 96 U.S.- manufactured aircraft, to be shipped assembled to Germany. In KdrCh 1959 the German Government purchased the licensing rights to build the aircraft in Germany. !+owever , the licensing arrangement did not allow the German Government to buy manufacturing data or information outright from Lockheed. Upon completion of the 1 icense terms, the German Government agreed to return to Lockheed all data and information it provided. By the end of 1959, BeJgium and the Netherlands decided that the air>raft being developed for Germany also met their requirements. In 1960 Italy came to a similar ccnclusion, and a European Consortium including Germany, Belgium, the Netherlands, and Italy was formed for the F-104G aircraft coproduction venture. The technical and finahcial details were included in a Memorandum of Agreement entered into by the Consortium countries and the United States in December 1960. To coordinate the coproduction effort, the Consor- tium countr ies established the “Organisme de Direction et de Controie.” In 1961 this organization was super- seded by the NATO F-104G Starfighter Production Organi- zation, which become responsi‘ble for coordinating and supervising ‘rhe cooperative production of the F-104G aircraft. In this role, t’e Organization reviewed all design changes and insured that the keapon system being manufactured in Europe met the dtfense criteria required for each specific country and for NATO as a whole. i The European assembly and prcduction of the F-304G aircraft totaled 949 aircraft --604 of which were required by Germany, 125 by Italy, 120 by ti\e Ketherlands, and 100 by Belgium.

25 APPENDIX III APPENDIX III

--F-104J AIRCRAFY PROJECT In November 1959 the Governments of the United States and Japan began negotiating the type of arrangement under which Japan would coproduce the F-104J aircraft. The Japanese Government selected Mitsubishi Heavy Industries as the prime contractor, the Fawasaki I Aircraft Company as the airframe subcontractor, and Ishikawajima-Harima Heavy Industries as the major engine manllfacturer. The primary U.S. company was the Lockheed Corporation. Other U.S. companies involved in manufacturing components for the F-104G also negotiated arrangements with Japanese companies which would be responsible for producing the items in Japan. In total, more than 500 licensees and licensers were involved in this coproduction program. By 1961 the government-to-government and industry- to-industry agreements were finalized and an order was placed for 200 F-104 aircraft. The second portion of the production arrangement called for an additional 30 F-104J aircraft. The extent of producticn in Japan varied for the aircraft produced. Of the first 200 F-104 aircraft ordered, 20 were to be of the trainer type. These aircraft were totally manufactured in the United States, disassembled, shipped to Japan, and reassembled by Mitsub'shi. The first 80 F-104Js were asselnbled in Japan from components and parts manufactured in the -. United States and shipped to Japan in the form of knock- down kits. I The remaining 100 aircraft and the 30 second-phase aircraft were primarily manufactured in Japan by local industries. Only 181 items of the thousands of parts and components comprising the F-104J could not be locally manufactured in Japan by the middle of 1965. By 1966 nearly all of the J-79 engine was being manc- factured there.

26 APPENDIX IV APPENDIX IV

LEGAL REVIEW OF F-104s AIRCRAFT TRANSFER FROM ITALY TO TURKEY

We have reviewed the legality of certain transfers. or proposed transfers of tw., sets of 18 F-104s aircraft from Italy to Turkey in view of the congressionally imposed cutoffs of military assistance c to Turkey. We believe that these actions or oroposed actions were not illegal. The following is an in depth analysis of this matter as requested. (It should be noted that agency comments were not received in the preparation of this memorandum as is our normal procedure. 1

Two separate so-called cutoffs or terminations of military assistance to Turkey were enacted in response to Turkish involvement in developments in Cyprus stemming from the commence- ment of the Cyprus conflict on July 20, 1974. The first enactment, * section 6 of the joint resolution, approved October 17, 1974, Pub. L. No. 93-448, &8 Stat. 1363, making continuing appropriations for the fiscal year 1975, provided:

“None of the funds herein made available shall be obligated or expended for military assistance, or for sales of defense articles and services (whether for cash or by credit, guaranty, or any other means) or for the transportation of any military equipment or supplies to Turkey until and unless the President certifies to tite Congress ;hat the Government of Turkey is in compliance with the Fnreign Assistance Act of 1961, the Foreign Military Sales Act,. a.nd any agreement entered into under such Acts, and that substantial progress toward agreement has been made regarcmg military forces in Cyprus: Provided, That the President is authorized to suspend the provisions of &is section and said Acts if he determines that such suspension will further negotiations for a peaceful solution of the Cyprus conflict. Any such suspension shall be effective only until . December 10, 1974 and only if, during that time, Turkey shallobserve the ceasefire and shall neither increase its forces on Cyprus nor transfer to Cyprus any U.S. supplied implements of war. ” (Emphasis added. 1 The President exercised this suspension authority under the proviso in section 6 on October 29, 1974. (Presidential Determination No. 75-3, 39 F.R. 39865 (November 12, 1974)). In the absence of his making the required certification, however, upon the mandatory expiration of the suspension, the cutoff again went into effect,

a. ___-. . - _.. - .- . . _. * APPENDIX IV APPENDIX IV

The second cutoff was imposed by section 22 of the Foreign Assist- ance Act of 1974, aFprOVed December 30, 1974, Pub. L. No. 93-559. 88 Stat, 1795, 1801, which added subsection x to section 620 of the Foreign Assistance Act ot 1961, as amended, 22 U.S. C. A. § 2370 (x1 (Pam. No.1, February 1975) as follows:

“All military assistance, a 11 Bales of defense articles and services (whether for cash or by credit, guaranty, or any other means),and all licenses with respect to the transportation of arms, ammunitions, and implements of war (including technical data relati;lg thereto) to the Government of Turkey, shall be suspended on the date of enactment of this subsection unless al:d until the President determines and certifies to the Congress that the Government of Turkey is in compliance with the Foreign Assistance Act of 1961, the Foreign Military Sales Act, and any agreement entered into under such Acts, and that substantial progress toward agreement has been made regarding militaq forces in Cyprus: Provided, Ttiat the President is authorized to suspend the provisions of this section End such Acts if he determines that such suspension will further negr;ti;:- tions for peaceful solution of the Cyprus conflict. Any such suspension shall be effe’ctive only until February 5, 1975, and only if, during that time, Turkeym observe the ceasefire and shall neither increase its forces on Cyprus nor transfer to Cyprus any United States supplied implements of war. ” !Emphasis added. !

Section 5 of the joint resoIution approved December 31, 1974, Pub. L. No. 93-570, 88 Stat. 1867, 1868, making further continuing appropriations for fiscal year 1975, contained a corresponding restriction on the use of appropriated funds. The President exercised the suspenslcll authority rf the second cutoff on December 31, 1974. (Presidential Determination T?o. 75-8, 40 I”.R. 4257 (January 29, 1974)). In the absence of the required PresidentiE.1 certification and the mandatory expiration of the Presidential suspension authority, the cutoff has again become effective. Accordingly, the embargo on military arms to Turkey, which began on October 17, 1974. has been in effect coritinuously thereafter except for the period October 29, 1974, until December 10, 1974 and the pei-iod December 31, 1974 until February 5, 1975.

Thn issue preBe-lted is wheiher either >r both of the foregoing cutoffs affect the legality oi the sales by Italy to T.lrkey of the two sets of F-104s aircraft, each consisting of 18 planes. Tl e most important factors relc- vant in such determinations are the forms CP the tranBactiol;B, the fact ;ilat the cor.templated sales were from Italy to Turkey rather than from the United States, and the dates upon which the events occurred.

-_ APPENDIX IV APPENDIX IV

The F-104s aircraft is manufactured in Italy under a co-production license. The plane is a derivative mcdel of the F-104G aircraft. The F-104G was originally licensed by Lockheed Aircraft Corporation (I+wkheed) for manufacture in Italy pursuant to a “Limited Licen

Although neither of the cutoff statutes is explicitly addressed to co-production, it does not necessarily follow that co-production, or at least aspects thereof, may not be affected by the language of the cutoffs. Accordingly, it is necessary to analyze the law relating to co-production and the specifics of the foregoing documents to determine if the transactions at issue were prohibited. Co-produ:Lion or licensed production outside the United States of defense articles of United States origin is currently specifically authorized by section 42 of the Foreign Military Sales Act, as amended, 22 U. E. C. § 2791 (Supp. III, 1973). It was apparently first authorized by subsection 201 (O)(5) of the Foreign Atisistance Act of 1967, approved November 14, 1967, Pub. L. No. 90-137, 81 Stat. 445, 457, although apparently not prohibited prior to that time. While thz term “co-production” is not statutorily defined, Paragraph III of DOD Directive No. 2000.9, “International Co-Production Projects and Agreements Between the United States And Other Countries or International Organizations, ” Jarmar-{ 23, 1974, provides as follows: I “A. The term I co-production’ as used herein encompasses any program wherein the U.S. Government, under the aegis of an international diplomatic level or Ministry of Defense-to- Department of Defense agreement, either directly through the FMS program, or indirectly through specific licensing arrangements by designated commercial firms, enables an eligible foreign government, international organization or designated commercial producer to acquire the ‘know-how’ to manufacture or assemble, repair, mainta-in and operate, in whole or in part, a specific weapon, communication or support system, or an inditidual military item.

_- - .--- APPENDIX IV APPElWlX IV

” 1. The ‘know-how’ furnished may include research, development production data and/or manufacturing machinery or tools, raw or finished material, componen+- or major sub-assemblies, managerial skills, procurement assistance or quality:control procedures. “2. Third country sales Jimitations and licensing c agreements are also included as required.

” B. Co-production may be limited to the assembly of a few . end-items with a small input of local country parts, or it may extend to a major manufacturing effort requiring the buildup of capital industries. ”

As is indicated, co-production arrangements may sometimes require the supplying of component defense articles and/or defense services to the producing country. These may take the form of grants or sales by the

l l United States Government or sales by U.S. commercial firms. Since each of these forms of supply is currently substantially governed by a separate statute, one co-production arrangement may be subject to restrictions contained in several statutes. The Fcreign Assistance Act of 1961, as amended, 22 U.S. C. §§ 2301 et seq., currently regulates U. S. Government military grants , while thz sr?@ Military Sales Act, as amended, 22 U.S. C. 5 2751 et seq., governs U.S. Government military sales. In addition, the Government exercises certain control over commercial sales to foreign purchasers of items on the Munitions List under section 414 of the Mutual Security Act of 1954, as amended, 22 U. S. C. § 1934, 0970 and Supp. III, 19’73), principally by the issuance or denial of export licenses. There are certain provisions in these acts whose application or nonapplication to the transactions at issue may be affected by the cutoffs. The Memorandum of Understanding in this case, Fupra, conten‘plated both governmental and private commercial particip.ation, although the degree of governmental participation which actually occurred is not clear. The substance of the Memorandum which is relevant here may, for purposes of convenience, be divided into parts. A major part of the agrec- ment, Article III(A), provided that the United States would permit the release to Italy of all information and technical data on a certam engine and missile necessary for their further adaptation, testing and production for F-104s application. In return, under Article III(C), Italy agreed, inter alia, to furnish the United States all technical data and information amrorn the development, testing and production of the F-104s weapon system, including the right to use and authorize others to use it royalty-free, although not for production purposes. Since the two governments also agreed to exercise their best efforts to protect pro- prietary rights owned by third parties required for the production of the

39 APPENDIX IV APPENDIX IV’

F-1045 weapon system (Article IV), presumably it was contemplated that Lockheed would be involved in the release of the fnlormntion and technical data and would be appropriately compensated,

As a seconct part of the agreement, the United States agreed to provide technical assistance on a reimbursable basis, including (11 source inspection for those items procured from United States sources; (2) United states tooling and facilities; (3) United States bases and test facilities; (4) services of United States specialists in development, procurement, and production, including pricing assistance; and (5) United States Government material and munitions require6 and utilized for prototype testing of the F-104s in the United States and for completion of the program in Italy. Article VIII(B). As a third part of the agreement, thp United States in Article II agreed to

“examine all available banking and Government financial resources and provide to Italy a guaranty of availability of up to $85 million in credit assistance, as requized for financing the articles and services to be procured from United States sources. Such credit assistance would be repayable over five years at an interest rate not to exceed five per cent per annum on the unpaid balance. ”

Article I(B) provided that of the estimated $410 million cost to be borne by Italy, approximate:qr $165 million worth of the articles and services was expected to bc prc*ured by Italy and Italian industry from United States sources. It should be noted that the language of neither cutoff appears to directly cover any of the foregoing part,: of the Memorandum of Understanding. More particularly, the first cutoff proscribes the use of appropriated funds by the United States Government “for military assistance, or for sales of ‘defense articles and services * + or for the transportation of any military equipment or supplies *(Emphasis added. 1 The second cutoff proscribes all sales of de:‘ense articles and services * * * and all licenses with respect to the transportation of arms, ammunitions, and implements of war (in.*luding tech;ical data related thereto) to the Government of Tu *key, * * * (Emphasis added. 1 None of the provisions of the Memorandum of Understanding refers to any United States Turkey transactions. Therefore, none of its provisions are directly affected by eithtr cutoff. Nevertheless, the foregoing does not inJure rhat the two sets of sales of planes by italy to Turkey are legal without regard at all to the cutoffs, for the cutoffs may indirectly iinpact on the transactions

31 APPENDIX IV APPENLM IV

so as to render them illegal, Such indirect consequences may result from the triggering by +.he cutoffs of specific statutory provisons of or regulations under the Foreign Assistance Act of 1961, the Foreign Mili~ry Sales Act, or the Mutual Security Act of 1954, which would proscribe the transactions at issue. Speci- fically, the concern is with potential application of statutory provisions or regulations relating to third country transfers. It is therefore necessary to categorize the parts of the Memorandum of Understanding to determine the primary statute under which each is governed so that the appropriate restriction on ti,ird courltry transfers may be examined for potential application. Accordingly, we rY%st consider the legal significance and ramifications of each of the parts of the Memorandum of Understanding seriatim.

The third part of the Memorandum of Understanding, as described above, dealing with the financing of articles and services to be procured from ‘United States sources, may create the most legal difficulty although it is apparently not the major part of the agreement. Under , the language of part three, a number of differing factuai situations could have occurred. We do not presently have knowledge of what actually occurred. For example, adequate private financial resotlrces may have been available to enable Italy to make the necessary procure- ments from the United States sources without any Governmental financial assistance of any form. Perhaps although private financial resources were available, a Governmental guarantee was required to consummate the transactions. On the ether hand, the Government itself may have made a credit sale to Italy of the necessary articles and services.

Since no Government grants are involved under any of the factual examples, it is clear that the Foreign Assistance Act of 1961, su ra, is not applicable to any portion of the third part of the Memoran ag-urn of Understanding. In the first factual example, smce tinerci would . be no Governmental financiai invoivement, the Foreign Military Sales Act, sl.:pra., also would not be applicable. In the second factual situation, even though there would be a financial commitment of the Government in the form of a guarantee, which is authorized by section 24 of the Foreign Military Sales Act, as amended. 22 U.S. C. 5 2764, (Pam. No. 1, February 1975), since no sale was involved, the restrictions on third country transfer contained in subsection 3(a) i of that act, as amended, 22 U.S. C. S 2753(a) (1970 & Supp. III, 1973) i quoted below, would not be applicable. In the last factual situation, \ a sale would be involved and, in the absence of an amendment to I . the Memorandum of Understanding extending the repayment terms for credit assistance, most probably any direct credit assistance 9 will have been repaid to the United States plus interest. The critical factor, however, is not repayment but whether any defense articles

9 32 I ‘k \. I-- procured with the use of United States Government credit assistance became components in any of the planes transferred or to be transferred to Turkey, since subsection 3(a) of the Foreign Military Sales Act, supra, provides in part:

“I~Jo defense article or defense serv’.ce shall be . sold by the TJnited States Government under this chapter to any country or international organization unle6s --

* * * * *

. (2) the countr or international organization shall have agree---s not to transfer title to, or o.ssesslon o I any defense article so furnished to it to anyone not an officer, employee, or Zgeint of that country or international organization and net to use or permit the use of such article for purposes other than those for which furnished unless the consent of the President has first been obtained;

* Q 4 * *

In cons’dering a request for approval of any transfer of any weapon, WEdpOnS system, munitions, aircraft, military boat, military vessel, or other implement of war to another country, the President Fhall not ive his consent under paragraph (2) to the transfer By-un essmiates Itself would transfer the s-under constderatlon to that country and prror to the-date he mtends to give his consent’to The transfer. the Presrdent notifres the SDeaker of fie House of Hepresentatlves c.nd the Commlttce on ‘Eoreqn Relations 01 the Senate m wrltmg of each - such mtended consent, the Justlfrcatlon for g~vmg such consent, t h e d etense artlc e or w ic h he mtends to give his consent to be so transferred, and rhe foreign country to which that defense article is to bead. In ddition, the President shall not give his consent und:r paragraph (21 to the transfer of any significant defense articles on the United States Munitions List -unless the foreign country requesting consent to transfer agrees to demili- tarize such defense articles prior to transfer, or the proposed recipient foreign country provides a

t APPENlDlX IV. APPENDM IV

commitment in writing tc the United States Govern- ment that it will not transfer such defense articles, if not demilitarized, to any other foreign country or person without first obtaining the consent of the President. The President shall promptly submit a report to the Speaker of the House of Representatives and to the Committee on Foreign Relations of the Senate on the implementation of each agreement entered into pursuant to clause (2) of this subsection, ” (Emphasis added. 1

The evidence we have available to us Yarn the Department of Defense is that no components of the 36 F-104s aircraft involved were provided to Italy under the Foreign Assistance Act of 1961 or the Foreign Military Sales Act. Assuming that information is accurate, :he requirements of subsection 3(a) would not apply before the transfers from Italy to Turkey could be authorized.

The second part of the agreement, covering the provision of incidental technical assistance on a reimbursable basis, does come within the Foreign Military Sales Act, as a sale of defense services, since a “defense service” is defined as including “any srrvice, test, inspecti )n, repair, training, publication, or technical or other assistance, or defense information used for the purpose of furnishing military assistance. ” 22 U.S. C. $ 2403(f) (19701. See subsection 45(c) of the F’oreign Military Sales Act, 82 Stat. 1320, 1327, 22 U.S. C. 5 2751 note (19701. However, the restrictions on third country transfers in subsection 3(21 of such act, su ra, are not applicable to sales of defense services. This is un if%-ers andable for most items of defense service except perhaps for sales of defense information. “Defsnse Information” incudes any document, writing, sketch, photograph, plan, model, specification, design, pl atotype, or other recorded or oral information relating to any defense article or defense service * * * . ” 22 U.S. G. S 2403(e)(1970). One consequence of the lack of statutory coverage of sales of defense information in the third qountry transfer restrictions of subsection 3(a) is that the United States has no statutory control over third country transfers of the defense articles pr0duct.d by the purchasing country using such defense information. For example, ha3 the United States Government sold defense informat;2n covering the F-104s to Italy, it would have no statutory control of transfers by Italy of 7-104s aircraft produced in Italy to any recipient third country. including Turkey.

With respect to ?!ie first part of the agr,eemEnt, transactions between a commerical U.S. corporation ant: a foreign government were contemplated. Lockheed, as owner of the overall design rights

34 APPENDIX IV APPENDIX IV

in the F-104G, had furnished to Italy “the information, data, draw- ings, plans, specifications and other material and matter” pertaining to that aircraft {Article S(a) cf the co-production license) in conjunction with its granting to Italy the exclusive right and license to manufacture or have manufactured within Italy the F-104G. Article l(a)(i) of the co-production license. After the signing of the Memorandum of Understanding between the United States and Italy with respect to the development of the derivative model F-104S, Italy executed the “Development Contract” with Lockheed, whereby, for a consideration, Lockheed agreed to reconfigure the F-104G airplane design to the F-104s design, to produce and deliver a modei specification for the F-104s to be manufactured in Italy, to furnish the necessary technical data and to furnish the services of technical specialists. Article 1 of the Development Contract. In conjunction therewith Lockheed granted Italy the exclusive right and lice;.se to mancfac- ture or have manufactured within Italy the Lockheed Model F-104s aircraft. Article l(b)(i) of the co-production license, as amended April 22, 196’?.

As indicated previously, such private commercial sales of defense articles and defense services, including technical data related thereto, to a forejgn government are statutorily governed by section 414 of the Mutual Security Act of 1954, 22 U.S. C. 5 1934, su ra, and regulations promulgated thereunder. Subsection 414(a), -F--o most significarce here, provides:

“The President is authorized to control, in further- ance of world peace and the security and foreign policy of the United States, the export and import of arms, ammunition, and implements of war, including technical data relati.ng thereto, other than by a United States Government agency. The President is authorized to designate these articles which shall be considered as arms, ammunition, and implements of war, including technical data relating thereto, for the purposes of this section. ”

Regulations entitled “International Traffic in Arms” (ITAR) have been promulgated thereunder in subchapter M of title 22, Code of Federal Regulations, Parts 121 through 128. Such regulations currently require, and have required at least since 1960, that proposed agreements between persons or companies residing in the United States and foreign persons or entities, private or goverrmental, for the manufacture abroad of or furnishing abroad of technical assistance concerning, arms, ammunltio:i, and implements of war on the U.S. Munitions List are required to be submitted to the Department of State before +he effective date of the

35 APPENDIX IV APPENDIX IV

agreement for review f-om the standpoint of United States foreign policy and military secur*ity. 22 C. F. R. $ 124.01 (April 1, 1975 and January I, 1958, cumulative pocket supplement January 1, 1964, respectively), The.t was clearly done with the co-production license ar.d amendments thereto in this case.

However, the primary concern here, as with the second and third parts of the agreement, are the conditions under which Italy could make third country transfers of the aircraft produced under the co-production license and the impact, if any, of the arms embargoes to Turkey. At neither the time of issuance of the original co-p: duction license relating to the F-104G alone cn March 2, 1961, or the time of approval of the amended license on Aaril 22, 1967 which expanded its coverage to the F-104s. did the ITAR regulations require the inclusion of third country trailsfer restrictions in co-production agreements. Such restrictions are, however, now contained in 22 C. F.R. 5 124.10 (April 1, 19751, which provides in pertinent part:

“Proposed manufacturing license and technical assistance agreements (and amendments thereto) shall be submitted in five copies ‘,o the Department of State for approval. (Such agreements shall not become effective until the Department’s approval has been obtained. 1 The proposed agreements shall contain, inter alia, all of t! 2 following information and statements in te: :ns as precise as possible, or tne transmittal lett[!r * * *< shall state the reasons for their omission or variation: * * * \ 8 *

“(k) Specific identification of the countries or areas in which manufacturing, production, processing, sale, or other form sf transfer is to be licensed.

“(m) (11 With respect to all minufac- turing license agreements, a statement that reads as follows: ‘No export, sale, transfer, or other disposition of ti:e licensed article is authorized to atry i country outside the territory :vhercain manufacture or saie is herein licer.sed without the prior written approval .)f the U. S. Government. I

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“(2) With respect to manufacturing license agreements for significant combat equipment, the Department may require that the prospective foreign licensee furnish an ‘Nth Country Control Statement’ (Form DSP-833: LU the Office of Munitions Control. The Mth Country Control Statement shall provide that the licensee agrees to ensure that any contract or other transfer arrangement with a recipient of the ljcensed article in any country within the licensed sales territory will include the following provision: “The recipient shall obtain the approval of the U.S. Government prior to entering into a commitment for the transfer of the licensed article by sale or otherwise to another recipient in the same or any other country in the world, ”

However, Article 14 of the instant co-production license stated:

$“(a) This agreement is subject to such laws and regulations of the United States of America as may be in affect from time to time with respect to the exportation or disclosure of data or material or with respect to any other provision of this agreement.

“(b) Licenser shall be excused from any failure to perform or delay in performing thts agreement caused by such laws or regulations or by any cause which results without the fault or negligence 0’. licenser, provided prompt notice of the cause of such delay shall have been given to the Licensee. ”

In addition, Article 16 of the Development Conr;act provided in part:

“(1) This contract is subject to such laws and regulations of the United States of America and the State of New Ysrk as may be in effect from time to time.

1 \ i APPENDIX IV APPENDIX IV

“(31 Contractor [Lockheed] shall not be liable for any delay in its performance under this contract due to causes beyand its control and not occasioned by its negligence or fault, or by reason of force -majeure. * * *”

Moreover, the market area was in fact specifically delineated in . . Article l(b)iiv) of the co-production license, as amended, where Lockheed granted ltaiy:

“The non-exclusive right to sell or have sold:

A. Complete F-104s airplanes and F-104s peculiar spare parts, special tools and ground service equipment to the Federal Republic of Germany, The Netherlands, and Belgium.

B. Modification kits for converting the F-104G airplanes to the F-104s configuration, along with F-104S peculiar spare parts to any European NATO Country (including Turkey) and Spain. ”

In additiorl, since Article l(d) of the co-production license, as amended, provides that “+he exercise of any rights granted by Licenser [Lockheed] under the terms of this Article 1 shall be subject to :: g: * any then effective agreement or understanding between the Government of the United States and Licensee [Italy], ” permission of the United States Government would be required for sales of F-104s aircraft, components or spare parts produced in Italy to tilird parties under Article V(B) of the Memorandum of Understanding. , Therefore, the total effect of these provisions is the same as if the current regulaticn on third country transfer had been in effect at the time of the issuance of the co-production license and the amendment thereto.

In terms of the specific transfers of concern in this case, the following factual background is necessary, As stated previously, the Cyprus outbreak commenced on July 20, 1974. On August 2, Lockheed requested Department of State approval that Article l(b)(iv) of the co-production license, quoted above, be amended so as to delete Germany, The Netherlands and Belgium from the market area and replace them solely with Turkey. The State Department reponded on August 16, 1974 by retaining Germany, The Netherlands and Belgium in the market area and merely adding Turkey thereto, with the following proviso:

38 APPENDIX IV APPENDIX IV

“This approval does not authorize the retransfer of any F-104S aircraft from Italy tc Turkey. Such authorization must be obtained through Government- to-Government channels and is subject to an appropriate undertaking by the receiving Government concerning further retransfer. ”

In the meantime, on August 7, the Government of Italy had requested permission in accordance with Article V(B) of the- Memorandum of Understanding to sell 18 F-104s aircraft to Turkey with an option for Turkey to purchase 18 more. It was then anti- cipated that 6 planes would be sent to Turkey within 15 days after a final agreement was signed, the balance to be delivered within 6 months. On September 20, the State Department advised that they were prepared to approve the transfer upon receipt from Turkey of assurances that Turkey would not retransfer the aircraft without U.S. consent, as authorized and illustrated.by 22 C.F.R. 9 124.10(m)(Z), supra. On October 8, Turkey signed the required third country transfer assurances, which were received by the United States on October 9. Also on October 9, the Senate passed H. J. Reo. 1131, 93d Gong., making further continuing appropriations for fiscal year 1975, clearing it for Presidential signature. Section n thereof prohibited the use of any such appropriated funds for arms to Turkey. The State Department gave its approval for the transfer of the first 18 aircraft from Italy to Turkey on October 11. On October 14, the Preside#lt vetoed H. J. Res. 1131, H. R. Dot. No. 93-369, 93d Gong., 2d Sess. His veto was sustained by the House of Representatives on October 15. Cting. Rec. HlO542-45 (Daily ed. )

Although the foregoing evidences a difference in policy between the legislative and executive branches of the Government, there was clearly no violation of law of which we are aware with respect to the approval of the rransfer of the’,$first 18 F-104S aircraft by Italy to Turkey, for no cutoff had as yet been enacted.

Continuing with’events , on October 17, 1974, the President signed H. J.Res. 1167, 93d Cong., into 13w, Public L. No. 93-448, which contained the first cutoff which is ‘(uoted above. He then exercised his suspension authority therek,nder on October 29, 1974, which was valid until December 10, 1974. The request for the transfer of the second 18 aircraft had been received on December 9, 1974. On December 1C the State Department approved the second set of proposed F-104s transfers by Italy to Turkey, subject to receipt from Turkey in writing of standard assui*ances regarding third party transfers. With the passage of ,:he Foreign Assistance Act of 1974, su ra, on December 30, 1974 and the continuing appropriations reso-f+ u ion, Public L.No. 93-570, supra, on December 31,

39 APPENDIX IV APPEXDIX 1V

1974, the President was authorized again to suspend the embargo on arms to Turkey, He exercised that authority on December 31, 1974, and the suspension continued until February 5, 1975 when the statutes mandated that it expire. In that interval , specifically February 4, the United States received the written standard assurances from Turkey on third country transfers of F-104s aircraft should Turkey exercise its option to purchase the additional set j of 18 planes. Thereafter, on February 5, the State Department gave approval of the transfer of the second set of 18 aircraft. We do not know whether Turkey in fact exercised its option.

Reviewing these facts for legal significance, we note initially *that the contingent approval of the second set of transfers occurred on December 10 and the final approval on February 5. The language of the respective cutoff statutes was that the respective presidential suspensions of the c, . offs “shall be effective only until December 10, 1974” and “until February 5, 1975. ” The legislative history does not specifically address whether the respective suspensions were to per- sist through December 10, 1974 and February 5. 1975 or whether the cutoffs were to resume on December 10, 19’74 and February 5, 1975. For the sharply divergent meanings given by the case law to the word “untii” in this context, see 43A Words and Phrases, “Until” p. 162 (1969 ed. 1. Accordingly, we cannot conclude that the actions of the State Department were unreasonable or invalid under the cutoff statutes.

Once one accepts the construction of the State Department with respect to the time limitations, it is evident that on the basis of the information available to us and disclosed herein, the approval OZ the State Department of the transfer from Italy to Turkey of the second set of 18 F-104s aircraft was not illegal, although perhaps not in accordance with the spirit of the statutes, since all of the critical -. events took place during the presidential suspensions of the cutoffs. Of perhaps more csncern is the fact that had Congress clearly intended the cutoffs to resume on December 10, 1974 and February 5, 1975, so that both critical events would have recurred on dates when the embargo on arms to Turkey was in effect, the approval of the State Department of the transfer from Italy to Turkey of the second set of 18 F-104s aircraft would still not be illegal. 1 This results from a significant difference between the restrictions on third country transfers contained in subsection 3(a) of the \ Foreign Military Sales Act, quoted earlier, and those contained I in 22 C. F. R. S 124.10(m) (April 1, 1975) under the Mutual Security Act of 1954, also quoted earlier , or their equivalent as develo ed 4 from the documents in this case. That is, under the former Ghe President shall not give his consent * * * to the transfer unless 'i

a 40 \ \ I-

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the United States itself would transfer the defense article under consideration to that country. ” No stlch restraint exists on the granting of United S tates approval to a transfer under the latter. Consequently, in this case , since the cutoffs only applied pro- hibitions on direct United States Government Turkey .transactions, there was no requirement that the United States heed the Congres- sional embargo on arms to Turkey for indirect United States Gcvernment involvement such as prevails under the facts of this case.

In conclusion, therefore, we believe that neither of the transfers or proposed transfers of two sets of 18 F-104s aircraft from Italy to Turkey was illegal despite the congressionally imposed cutoffs of arms to Turkey.

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BIBLIOGRAPHY

BOOKS AND THESES . Catledge, Morris 8. and Xnudsen, Lcuie F. Foreign United States Involvement in mt$i?%;d Trends Toward Codevelopment. Air Force Inst1tutemechnology (SLSR-20-69). Wright-Patterson Air Force Base, Ohio, 1969. Cornell, Alexander Herbert. An Analysis of Inter- national .-- Collaboration in the Organization on Management of Weapons Corproduction. Amer iZk University, Washington, D.C., 1969. Stanley, John and Pearton, Maurice. The Interna- tional Trade in Arms. New Ycrk: Praeger KiKKZers, 1972. Vandevanter , Brigadier General E., Jr. USAF (Ret). Coordinated Weapons Productions in NATO: A Study of Alliance Processes. The RAND Corpora- tion Memorandum 4i6-PR. Santa Monica, California: The RAND Corporation, November 1964.

STUDIES AND REPORTS l “Appraising Foreign Licensing Performance,” Studies in Business Policy, No. 128, Nat ional Industr ial Conference Board, Inc., 1969. Carter, Geogory A. Directed Licensing: An Evalu- at ion of a Proposed Technique for Reducing the Procurement Cost of Aircrah. The RAND Corporation Report, R-1604-PR. Santa Monica, Cal ifornia: The RAND Corporation, December 1974. “Foreign Licensing Agreements: I, Evaluation and Planning ,” Studies in Business Policy, No. 86, 1958, National Industrial Conference Board, Inc. “Foreign Licensing Agreements: II, Contract Nego- tiations and Administration,” Studies in Business Policy, No. 91; 1953, National IJxdustrial Con- i ference Board, Inc.

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I Hall, G.R., and Johnson, R.E. Aircraft Coproduc- tion and ProcurementI_- Strategy The RAND Corpo- ration Report 4-R. Santa Minica, California: The RAND Corporation, May 1967. U.S. Department of the Air Force, Information and Guide1 ines -on Mil ItaxAssistance, Grant Aid and Foreign Mimy Sales. Washington, D.C., 1970.

U.S. Department of the Army, AMC Role in Coproduc- . tion, briefing presented in Washington, D.C., =-August 1971. U.S. Department of the Army, U.S. Army Materiel Command, Case History of the Ml13 Armored Personnel Carrier, Italy Coproduction Pr-ct. / Washington, D.C., January 1972. U.S. Department of the Army, The Rcle of Coproduc- t tion in International Logistics, (ALm5-2514-LC) 0.S .: General Accounting Off ice, “Letter Report B-133295, August 17, 1970.” Washington, D.C., 1970.